Up-to-the-minute advice, information, resources, and, on occasion, commentary on federal and New Jersey state income taxes, and the various New Jersey property tax rebate programs, and insights and observations on tax policy and professional tax practice, by 40-year veteran tax professional Robert D Flach.

Monday, January 16, 2012

It’s that time of year again! Time
for one of my favorite all-time posts – and one of my most commented-upon – the
one that tells you not to make assumptions when looking for someone to prepare
your tax return.

As usual, I begin with the episode
of the ODD COUPLE television series where Felix explains to Oscar what happens
when you assume (you make an ass out of u and me), and tell you that making
false assumptions when choosing a tax preparer can be costly

1) Don't assume that because a
person has the initials "CPA" after his name he is an expert when it
comes to federal and state income taxes!

The CPA designation means that a
person passed a very difficult test at the beginning of his/her career,
possibly many, many years ago. Only a very small part of this test dealt with
federal income tax, and usually with “entity” tax issues (corporate,
partnership, estates and trusts) and not 1040 issues. It is certainly no
guarantee that he/she is competent or current on federal and state individual
income tax law, or that he/she has actually prepared a Form 1040 for a client
since passing the test.

Whenever I would get a new client
(which I do not anymore – as I do not accept any new 1040 clients) I ask to see
his/her last three (3) years’ tax returns, to make sure I do not miss any
carryforwards and, more important, to see if there are any errors that I could
correct on an amended return. In my 40 years of preparing tax returns I have
found more mistakes on 1040s prepared by CPAs than by any other class of
preparer, including the taxpayer himself.

Some 30 years ago I was a
"para-professional" in the Small Business Services Department of one
of the then "Big Eight" CPA firms (Deloitte Haskins + Sells). While
reviewing the prior year's federal and state tax returns of a client whose
current returns I was preparing I found a very obvious error on the state tax
return that caused the client to pay more tax than necessary. Under the firm's
policy, the return, which had been originally prepared by a CPA, was reviewed
by his "manager" (also a CPA), and signed-off on by the head of the
department (a CPA) and a member of the Tax Department (a CPA). Not one of these
CPAs picked up the obvious error!

A student in one of the tax
planning/preparation courses I taught at local suburban adult schools many
years ago asked me what was the difference between a tax return prepared by a
CPA and one prepared by me (I am obviously not a CPA). My answer was "at
least $100.00" (that number needs to be seriously adjusted for
inflation!). I have often said that having initials after one’s name often
causes one to charge twice the price for half the service.

CPAs have higher overhead costs
than most currently “unenrolled” preparers, for malpractice insurance for
example. These higher overhead costs usually apply to their audit work, but are
still passed along to 1040 clients.

There has been some concern in the
past about the practice of CPA firms “outsourcing” the preparation of 1040s to
India. This should not be a cause for concern. Between you and me - you are
much more likely to have your 1040 prepared properly and accurately by a
contracted preparer in India than by a CPA here in the United States!

Many of my fellow tax bloggers,
who happen to be CPAs, will tell you that what I say in this post is correct. For
example, in discussing the IRS decision to exempt CPAs and attorneys from
testing and continuing education requirements in its proposal for regulating
the tax preparation industry, a CPA tax blogger said –

“Being a licensed CPA or attorney is no guarantee of tax expertise. The
licensing examinations do not emphasize tax law. Plus, neither is required to
take any tax related continuing education to maintain their licenses. Truth is
many CPAs and attorneys have little tax experience. I should know. I prepare
tax returns for them.”

The post ends with - “Virtually every new client I get is an
amended tax return waiting to happen. Guess who prepared the returns I’m
amending…mostly CPAs!”

I have said it time and again –
just because a person has the initials CPA after his/her name does not mean
that he/she knows his/her arse from a hole in the ground when it comes to
preparing 1040s.

The only initials that have any
meaning when it comes to tax preparation are "EA" - Enrolled Agent (I
am also not an “EA”). The name is misleading. An EA is not an agent of the
Internal Revenue Service, but a private tax professional who is "enrolled"
to act as a taxpayer's "agent" in proceedings with the IRS and in Tax
Court. To become an Enrolled Agent one must pass a difficult test that is 100%
federal tax law. In order to maintain their enrolled status, EAs must have a
mandatory number of continuing education credits in taxation each year. Both
the initial competency test and the CPE requirements are more strict than those
required of the Registered Tax Return Preparer.

While the IRS was right to exempt
Enrolled Agents from the testing and CPE requirements of the new regulation
regime, it was dead wrong to exempt CPAs (and attorneys). The higher ups at the
IRS know full well that the initials CPA (or JD) have nothing to do with
competency in federal income tax matters, but feel they are statutorily
restricted from placing additional requirements on those with these initials.

As I have said before – once the
return preparer regulation regime is fully phased in, only those individuals
with the initials EA or RTRP will have proven competence and currency in 1040
preparation.

2) Don't assume that H+R Block, or
any other “fast food” commercial preparation chain, will charge a low, or even
reasonable, fee for preparing your tax return!

When my mentor and I got a hold of
the H+R Block fee schedule back in the late 1980s we were in complete shock -
Henry and Richard ain't cheap!

They, and others of their ilk, are
very expensive, especially considering the quantity and quality of the service
they provide. They charge fancy restaurant prices for fast food service! Plus
they will attempt to squeeze even more money out of you by trying to push you
into unnecessary, but profitable to them, products like a high-fee H+R debit
card, or a Block-sponsored high-fee, low-yield investment that is practically
guaranteed to lose money.Thankfully
they no longer attempt to force Refund Anticipation Loans (RALs) on
lower-income clients.

While, like anything else, the
market affects the price of tax preparation, the major factor affecting the
fees charged is overhead. Let’s look at the overhead of these chains.

Because the storefronts where
these chains are located are usually in high traffic commercial areas, and
often shopping malls, the rent is generally very high. And an important factor
– H+R and Liberty and Jackson Hewitt storefronts are only open during the tax filing
season, yet they must pay rent on the property for the entire year.

These chains have excessive
advertising budgets during the season, spending millions of dollars on constant
tv and radio spots as well as print advertising telling you not that they competently
prepare accurate tax returns but simply to come into their office and walk out
with a check. Hey, doesn’t H+R advertise during the Super Bowl.

H+R Block et al are corporations,
and have highly compensated upper level corporate officers and employees with
generous employee benefits. A while back the Associated Press reported that “H&R Block Inc. CEO Russell Smyth
received compensation valued at $5.3 million in fiscal 2009, the year he took
over leadership of the nation's largest tax preparer”.

And,
most notable of all, Henry + Richard, Jackson Hewitt, and Liberty need millions
of dollars for legal fees and the settlement payments for the many, many
lawsuits for deceptive advertising and other unethical business practices.

With commercial preparation chains
I expect that the actual cost of preparing the return - salaries paid to the
seasonal preparers and the training of these preparers - is one of the least
expensive items in the budget.

Returns prepared by the employees
of Henry and Richard and the like are second to CPAs in terms of errors I have
discovered on 1040s over the years. My mentor always said that he wished H+R
Block would move next door to our office - we would make a fortune fixing their
mistakes!

A few years ago the Government
Accountability Office (GAO) conducted a study which resulted in a report to
Congress titled “Paid Return Preparers: In a Limited Study, Chain Preparers
Made Serious Errors”. The GAO sent undercover agents with two different tax
scenarios to a total of 19 offices of 5 “fast-food” commercial tax chains,
including H+R Block, in a metropolitan area. In only 2 instances was the
correct refund calculated, but all 19 returns contained errors.

Some of the more serious errors
included –

• not reporting self-employment
income in 10 of the 19 cases,

• claiming an Earned Income Tax
Credit on an ineligible child in 5 of the 10 applicable cases,

• not claiming the education
benefit (credit or deduction) that resulted in the least tax in 3 of the 9
applicable cases, and

• not claiming all available
itemized deductions, or not itemizing at all, in 7 out of the 9 applicable
cases.

I was told by the GAO that not one
of the 19 preparers in the study had asked to see the undercover taxpayer’s
prior year’s return!

The GAO agents also discovered
unethical sales practices related to Refund Anticipation Loans (RALs). The
annualized interest rate for the RALs offered to the “taxpayers” ranged from
380% to 470%.

Other undercover operations, by
TIGTA, local tax agencies, and consumer protection organizations, have found
similar results.It was these studies
that started the ball rolling on the preparer regulation regime.

When looking for a tax
professional, as with any other professional, it is best to get a referral from
a trusted friend or relative.

As always, I must be perfectly
fair. Over the years I have come across CPAs who were extremely competent and
current in 1040 matters, and even some who charged reasonable fees. But this is
not a “given” based on the initials only. And I am sure that there are probably
some competent, current, ethical and professional H+R Block preparers out there
somewhere (though you couldn’t prove it by me).

And I end on my usual caveat. It
may actually be possible that the best tax preparer, at the best price, for
your particular situation is either a CPA or an H+R Block, or other fast-food
chain, employee. But this is only because of the education, experience,
ability, temperament, and other factors that are specific to that individual preparer.

(1) I do not have the time to properly prepare any more tax returns during the limited February-April tax filing season, and I hate GD extensions. I already have more 1040 clients than I can handle during the season. And I am only going to do this for 9 more tax seasons,

(2) I would say "Anywhere from $45 to $250 - it depends on the return". I would offer to provide a copy of my fee schedule.

I agree with TWTP that the CPA credential carries with it an often undeserved reputation of being the most qualified of tax preparers. I would make the point though, that even though EAs have the advantage of being strictly focused on tax, many CPAs also focus only on taxes and do not do audit/attestation work. It is simply too hard to be a generalist if you want to have an advanced level of professional knowledge and ability. Many CPAs specialize in such a fashion, though their credentials aren't going to show it.

Secondly, regarding the continuing education requirements for EAs, anyone who has been to such classes knows they CAN BE of little value. There are no tests required for credit, one simply has to attend and put in the hours, just like CPA professional ed.

As far as the exam requirement for EAs, I'm well acquainted with it, having just passed all three parts in the past two months. The exams were not easy, but they are designed to test a certain minimum level of competency, not a mastery. The level of knowledge necessary to pass can be obtained with an intensive period of study, but it doesn't take that long. Passing the exam and being admitted as an EA doesn't make one well qualified, rather it just indicates one should be AT LEAST minimally qualified, and one who should know how much they don't know.

Being tax preparer for the last 22 years I can say that I agree with (almost) every world you say!And, regarding "when a potential "1040" client called you and asked "what do you charge to prepare a tax return?", how did you answer him?"- I usually don't take clients that start with this question,but if I'm in good mood and have some time to spare, I ask "and what is your budget?" or "like a visit to restaurant"- the people that start with such question NEVER coming even if they schedule appointment..

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VERY IMPORTANT -

(1) Before contacting me with questions about how a blog post relates to your specific situation, please be aware that I do not give free tax advice to non-clients by e-mail, comment response, or phone. So don't waste your time and mine.

(2) I am winding down my tax practice, and I will not, under any circumstances, accept any new clients. Period. I am actually trying to "thin the herd".